Tax Consequences of Giving Your Employees a Holiday Gift

Article Highlights:

• De Minimis Fringe Benefits

• Cash Gifts

• Gift Certificates

• Group Meals

• FICA and Wage Withholding

It is common practice this time of year for employers to give employees gifts. Where the gift is infrequently offered, and has a fair market value so low that it is impractical and unreasonable to account for it, the gift’s value would be treated as a de minimis fringe benefit. As such it would be tax-free to the employee and tax deductible by the employer.

A gift of cash, regardless of the amount, is considered additional wages and subject to employment taxes (FICA) and withholding taxes. Caution: if the gift recipient is a W-2 employee, the employer may not issue them a 1099-MISC for a holiday gift of cash; the amount must be treated as W-2 income. Where an employer gives gift certificates, debit cards or similar items that are convertible to cash, the value is considered additional wages regardless of the amount. However, if the gift is a coupon that is nontransferable and convertible only into a turkey, ham, gift basket, or the like at a particular establishment, the gift coupon would not be treated as a cash equivalent.

Holiday group meals, cocktail parties, picnics or the like for employees are also treated as de minimis fringe benefits.

If you have questions about holiday gifts to employees, please give this office a call.